Gold In The New Economy

January 8, 2001 – On December 3rd, the Sunday Telegraph, which is one of London’s leading newspapers, published an article about my new Internet venture, GoldMoney.com. The article read in part:

The oldest medium of exchange moves online …[in January 2001] with the launch of GoldMoney.com, an internet currency provider that will allow users to pay for products anywhere.

GoldMoney, based in the Isle of Man, says it has developed an e-commerce payment system that enables global buyers and sellers to make and accept instantaneous payments in weights of gold called GoldGrams. A GoldGram represents a gram of gold held in vaults with the system working on the principle that users transfer gold from buyer to seller without it leaving the vault.

The current price of a GoldGram can be checked on the web site in various currencies. The gold price has been falling, but the company points out that while a GoldGram would have fallen in value against the yen, it would have risen in value against the euro over the past year.

The system, aimed at corporations and cross-border traders, is designed to eliminate payment risk as there is no possibility of default on payment and it uses high strength encryption software, downloaded by account holders. Payments are processed in real time with funds transferred instantly. It also offers low transaction fees …[that are]much less than bank fees for wiring currency.

James Turk, founder of GoldMoney, said: “We are taking the world’s oldest money, gold, and using 21st century technology to enable its circulation as a currency in global commerce.” He aims to make it the common currency of global commerce.

The story behind GoldMoney is an interesting one, that has been over twenty years in the making. Along the way I secured two US patents on a unique process that enables gold to circulate electronically as currency.

I conceived the idea behind the patents and GoldMoney in February 1979 as a solution to Herstatt risk. I was the Assistant Manager of the Chase Manhattan Bank in Bangkok, Thailand when the Herstatt Bank failed in June 1974, so I witnessed first-hand the devastating impact on international commerce from this collapse. It seemed absurd that the failure of one medium sized bank in what was then West Germany could have such a crippling effect, but it did bring many banks around the world to their knees, severely impairing the global economy. So in my spare time I set about learning more about the nature of currency in order to seek a solution to Herstatt risk.

Over the 26 years since Herstatt failed, the big banks have spent hundreds of millions trying to solve Herstatt risk, but given the nature of their currency, that task is impossible. They can reduce/minimize Herstatt risk, but they cannot eliminate it. This recognition eventually led to my solution in February 1979, and that solution is embodied in GoldMoney.

Simply put, currency today is a liability on the balance sheet of banks. Cash currency is a liability of central banks; deposit currency – the money in checking and savings accounts – is a liability of commercial banks. These central/commercial bank liabilities circulate as currency only because they are backed by assets with value. If these assets become value impaired, the liabilities backed by the assets become impaired as well, creating Herstatt risk and other currency distress. And these problems can only be solved if assets, as opposed to liabilities, circulate as currency. This point can be explained with a simple example.

A gold coin passed from the hand of the buyer of some good or service to the hand of the seller is an asset circulating as currency. The gold coin is not issued by a bank, nor is it backed by any asset – IT IS the asset. Compare this example with a Gold Certificate circulating as cash currency. The Gold Certificate is a liability of a bank, backed by the assets of that bank. To use two historical definitions not often seen today, gold is money, but any currency that is a liability of a bank is only a money-substitute. It perforce is not money.

While gold over the centuries has proven to be good money, it has also been an inconvenient and inefficient currency, which explains why money-substitutes – like paper currency and bank deposits – were created. It was more efficient to leave the gold in a bank, and accept that bank’s note for use in commerce. But what worked well in the 18th and 19th centuries began to break down in the 20th, largely because the monetary process was increasingly usurped by government for political objectives. As a result, money-substitutes became increasingly unsound, causing governments to attack their competition, namely, money/gold. But this policy of government is I believe doomed to fail.

Even back in 1979 it seemed to me that when viewed within the sweep of history, money-substitutes – the currency of today’s nation states – would in time face increasing competition from new sources, particularly in cross-border commerce because these transactions are beyond the scope of any one country. That new competition in my view would be ‘electronic’ asset currency, which was the essence of my idea. But though I was only 32 at the time, I never thought this idea could be put to use in my lifetime. The technology just didn’t exist back then. PC’s were a hobby, not the necessity they’ve become; no one ever heard of the Internet; and transatlantic telephone calls cost a small fortune, if you were actually fortunate enough to make the connection.

In September 1979, I bought my first personal computer, an Apple II, and while I recognized the potential of the PC, even then I did not think that the technology would move forward fast enough to make GoldMoney a practical reality. But by the late 1980’s, I began to sense that the technology was developing quickly enough so that maybe my earlier assessment was incorrect, and that GoldMoney might soon be possible/practical.

Because I recognized in the late 1980’s that I was still early in my thinking, I set about researching how best to protect this new currency solution to solve Herstatt risk. By 1990 I was studying patent law to see whether I could secure the idea, with a view to turning it into a business when the technology was ready. In 1992 I hired a patent attorney, and filed the first application in February 1993. Even back then the Internet was still more a vision than a reality, but it seemed that we were getting close to the technology I required.

The first patent was finally awarded 4½ years later in September 1997. By this time my son, Geoffrey, joined me to develop this business opportunity. We jointly filed the second patent application which was awarded in November 1999. A third patent application we again filed jointly is still pending.

My patent attorney says that the 4½ years it took for my first patent to be awarded was the longest time he ever saw an application pending. In the end though the patent was granted because it advanced the ‘prior art’. In other words, I created a new form of currency that was better than existing currency. The proof of this statement is that it eliminates Herstatt risk.

Nobel Laureate Robert Mundell, in a paper about Gresham’s Law , makes an interesting and I think accurate observation about the history of currency: “Among the precious metals, gold drove out others…because it was more efficient from the standpoint of effecting transactions at the least cost. The dollar became the dominant international money in a world of paper currencies…because, among the alternatives, it best satisfied the characteristics of an international money.“

Note the use of his qualifier, “among the alternatives”. The world today is much different from when the Dollar became international money at the Bretton Woods Conference in 1944. And most importantly, we today have alternatives, made possible in part by technology. Moreover, we have the incentiveto search for these alternatives because the Dollar today is not the pillar of monetary stability that it was in 1944. In short, the Dollar today is no longer ‘as good as gold’, the popular phrase at the time that characterized the Dollar’s unchallenged position.

I think we are moving full circle back to gold, but gold will circulate as currency in a way that overcomes the impediments that stopped it from circulating as currency in the past. GoldMoney aims to deliver a currency that is more efficient than any currencies now existing.

With GoldMoney, owners of GoldGrams (one gram of gold, and the unit of account of GoldMoney) always own their metal. GoldMoney never takes possession of it. The metal is placed in vaults around the world (we use the term Storage Sites), and is always held in the name of the customer, until it is spent. At the moment the GoldGrams are spent, the ownership of those GoldGrams changes. The weight of gold remains in the Storage Site, but the ownership changes the instant the GoldGrams are spent. It’s the electronic equivalent of a gold coin passing from one hand to another, but the gold always remains in the vault. A couple of points of explanation will be useful here.

1) GoldMoney is not a fractional reserve system. The total quantity of GoldGrams in circulation is always exactly equal to the weight of gold in the different Storage Sites.

2) One GoldGram is composed of 1000 mils for precision in transactions. At $311 per ounce, one GoldGram exchanges for $10, and one mil exchanges for 1¢. At the current price of $268 per ounce, one GoldGram exchanges for $8.62.

3) Access to GoldMoney is provided anywhere in the world through a standard web browser, with 24/7 availability and access to your money.

4) All payments are made in real-time, so there is no float, clearing, etc. Therefore, GoldMoney avoids the problems these processes create, ranging from the niggling, such as lost wire transfers, to the catastrophic, like Herstatt risk.

The above explanations are not meant to be all encompassing, but rather, they highlight some basic attributes of GoldMoney. I think it also shows that GoldMoney is well thought out, which shouldn’t be too surprising because I’ve been thinking about it and working on it for 21 years now.

I think that with GoldGrams we are creating the currency of the 21st century. That may sound presumptuous, but it seems logical to me. After all, all we are doing is taking the world’s oldest money, and enabling it to circulate as currency in a way that overcomes those impediments that stopped gold from circulating as currency in the past. Even though many of gold’s fundamental attributes as money have been forgotten, they have not disappeared. GoldMoney will see whether those attributes remain important, and if they do, then the market will prove whether or not GoldMoney will be commercially successful.

Finally, the Internet today – when it comes to money and currency – is very much like the automobile ‘industry’ at the beginning of the 20th century. When the car was first invented, it was a horse-carriage (a ‘buck-board’) without the horse, a guy sitting up top, trying to drive this new contraption with a stick. Those early inventors/entrepreneurs did not realize the invention of the automobile was so profound that they no longer had to think of transportation as what it was conceived to be up until that moment in time. New ideas about power, weight and comfort evolved slowly, so it took a few years before an automobile that we could recognize as ‘modern’ emerged with fenders, doors, glass and a roof.

Attempts to make plastic credit/debit cards circulate today on the Internet are not unlike those first automobiles which look better suited to being pulled by a horse than having any similarity to what we now consider to be a car. Just like those early automobile inventors/entrepreneurs, those who have ‘created’ the early versions of Internet ‘currency’ are merely transpositions of what currency is conceived to be today – mainly plastic. These early Internet currency promoters have not generally recognized that the invention of the Internet is so profound, we are not restricted to thinking narrowly about what currency will be or should be on the Internet in the future. Currency will evolve in ecommerce like those first automobiles evolved with trial and error. And given gold’s historical role as money, I expect that GoldMoney will become an important currency on the Internet. It is our objective to make GoldMoney the common currency of global commerce. Of course only time will tell whether we will be successful, but that result is the beauty of an unfettered market and the outcome of competition.

I hope this information is of interest. In the meantime, you may want to visit GoldMoney and record your email address to receive updates on our progress as we approach the launch date.

In summary, GoldMoney is creating a currency that is more efficient – it is better – than the currencies that exist today. I am therefore hopeful that GoldMoney will benefit its users, thereby making GoldGrams essential in the new economy of

global ecommerce.

ABOUT

My objective is to share with you my views on gold, which in recent decades has become one of the world’s most misunderstood asset classes. This low level of knowledge about gold creates a wonderful opportunity and competitive edge to everyone who truly understands gold and money.